What’s in store for Wi-LAN after negative ruling?

Wi-LAN Inc.’s share price took a beating on Monday after the Ottawa-based patent licensing company received a negative ruling from the jury in its 3GPP trial with Alcatel Lucent, Ericsson, HTC and Sony.

The stock fell 33% to $3.30 after the jury determined the defendants did not infringe on the four patents in question and believed that a number of claims within three of the patents were invalid.

However, analysts continue to be optimistic about Wi-LAN’s prospects going forward.

The stock rebounded 14.5%, or 48¢, to $3.78 at 12:28 p.m. ET Tuesday.

“We believe the backlash to the adverse jury decision is an over-reaction,” Canaccord Genuity’s Robert Young told clients. “We were expecting a positive outcome given a positive Markman hearing leading into trial.”

He estimates Wi-LAN shares are now trading below the net asset value of the company’s contracted backlog, cash and residual value of patents.

“We see moderate impact to Wi-LAN’s ability to generate future revenue growth from this development and low risk to the existing backlog of contracts,” Mr. Young said, adding the decision does put potential licensing of more than $100-million over five years at risk.

“This is one step in a longer process, and we believe Wi-LAN has additional levers to encourage settlement…with the defendants, including appeal but also existing and new suits related to additional patents,” the analyst said.

Wi-LAN is litigating an additional five cases in 2013.

Eyal Ofir at Clarus Securities acknowledged the ruling is a significant short-term set-back for Wi-LAN, but reminded investors the decision relates to just four of the company’s 1,000-plus wireless patents and 3,000-plus total patents. It will also not impact the licensing agreements currently in place.

“That said, this was the first time WiLAN sat through a patent infringement trial and hence will leave investors questioning the risk inherent in the upcoming trial schedule, especially without early settlements,” Mr. Ofir said in a research note. “This will likely cause the shares to trade at a discount until there are either settlements or a win verdict in court, but the shares should bounce from yesterday’s over reaction.”

The analyst estimates Wi-LAN’s backlog and cash is worth $3.40 per share, assuming zero value to the patent portfolio, which could serve as a floor for the stock.

Mr. Ofir’s initial estimates factored in approximately $15-million to $20-million per year in revenue from the case.

“With the shares sitting near this level, the company’s patent portfolio is not being given any value,” the analyst said. “Hence, while this was a significant litigation loss, investors have to remember that there is value inherent in the company’s patent portfolio and the shares should recover as we head toward the October trial date against Apple. If the stock remains materially discounted, it could also present an opportunity for a company to be put in play by one of its’ US counterparts.”

Justin Kew at Cantor Fitzgerald was surprised at both the pace of the trial and the jury’s determination of no infringement and that the claims were invalid – “the worst case scenario for Wi-LAN.”

The analyst believes this trial potentially delays the timing of settlements, but does not impact upcoming trials, which assert different patents. He noted Wi-LAN has approximately $170-million in cash and therefore the ability to complete the current aggressive litigation activity.

Investing Videos

Promoted by iShares by Blackrock

Active Investor was produced by Postmedia's advertising department in collaboration with iShares by BlackRock to promote awareness of this topic for commercial purposes. Postmedia's editorial departments had no involvement in the creation of this content.